I. Introduction
Socially responsible investing (SRI) is an investment strategy that incorporates social, environmental, and ethical considerations into the investment decision-making process. According to Renneboog et al. (2008a), “Investors in SRI funds explicitly pursue two types of goals: the economic rational goal of wealth-maximization and social responsibility.” That is, investors pursuing a SRI strategy attempt to “do well while doing good”. The introduction of non-financial screening criteria into the investment decision-making process raises the question of whether investors must forgo financial performance in order to invest according to social values. Answering this question is the key contribution of this study.
The concept of ethical investing has been practiced since 17th century when the Quakers refused to profit from the weapons and slaves trade in North America (Renneboog et al., 2008b). However, recent trends suggest SRI is increasingly moving towards the mainstream of the investment universe as a result of the rise in ethical consumerism and an increased focus on corporate social responsibility (CSR). According to the Social Investment Forum, at year-end 2011 an estimated $3.74 trillion in U.S.-domiciled assets was invested in mutual funds that are practicing SRI strategies, representing 11.3% of total assets under management. This figure represents a 22% increase since year-end 2009 and a 486% increase since 1995 when the size of the U.S. SRI market was first measured (SIF, 2012).
The screen criteria used in SRI has evolved as investors’ social concerns have broadened. Early SRI strategies focused on negative screening – the exclusion of specific companies or industries from the SRI portfolio based on social...
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...RI, whereas funds run by companies not specialized in SRI underperformed conventional mutual funds. This suggests that investors need to account for management company characteristics when evaluating SRI investment opportunities. Alternatively, Rennboog et al. (2008) found that SRI mutual funds in many European, North American and Asia-Pacific countries strongly underperformed domestic benchmark portfolios (from -2.2% to -6.5% per annum) when using the four-factor model to measure risk-adjusted returns; however, when the alphas of the SRI mutual funds were compared with those of matched conventional funds there was no statistically significant evidence that the SRI mutual funds underperformed in most countries. Exceptions were the SRI mutual funds in France, Ireland, Sweden, and Japan, which showed statistically negative alphas compared to conventional mutual funds.
In most cases, profits and social welfare are at odds. In such a case, business executives being answerable to shareholders are likely to focus on the profit-making aspect of the business rather than going against the interest of their shareholders by promoting social welfare at the expense of profits. In addition, research shows that companies actively involved in Corporate Social Responsibility efforts are more likely to be targeted by activists (Kress, 2011). In fact, it has been established that many companies initiate corporate social welfare projects when they stand to gain from those projects. For example, automakers resulted to creating fuel-efficient vehicles when they became profitable; similarly, energy conservation became an important CSR activity when the cost of energy became very costly. As such, the companies are benefiting their society as they follow their own
This case discusses the unique value proposition of Dimensional Fund Advisors (DFA), which used academic research to create specialized portfolios focused on Small Capitalization companies. Their investment philosophy particularly focused on research by Fama and French and Banz. They researched how small cap companies tend to outperform large cap companies over time. In addition, FDA created an additional competitive advantage by created trading efficiencies to reduce transaction cost.
Mutual funds were long considered one of the best available easy-to-invest instruments that minimized risk and maximized returns. In the 80’s and 90’s, the US financial markets made trillions of dollars with the mutual fund structure. The funds, especially the most actively managed ones, were expected to outperform the market index in the long run. However, with expense ratios ranging as high as 1.5% to 2.5%, the funds underperformed the index by the amount of their expense ratio.
Growth and value investing are two distinct styles of investing that have spurred interest from investors and academics alike. Scholars have come to agree that value investment strategies, on average, outperform growth investment strategies (Chan et al., 2004, p.71). However, the underlying cause of this discrepancy in performance is still highly debated. In Chan and Lakonishoks’ (2004) research they dismantle the argument that the performance differential is a result of a difference of risk and look towards behavioral theories that can explain the superior value investing strategy. The researchers hypothesize that individual investors have a tendency to use simple heuristics in picking a security, resulting in a selection of securities with recent high earnings yet a lack of consistent earnings (p.76-77). This behavioral analysis parallels Statman’s (2004) use of behavioral analysis of the tendency for individual investors to utilize simple heuristics in their decision to not diversify their portfolios (p. 44). Chan and Lakonishoks’ (2004) use of the behavioral theory to call to attention an excellent explanation for the improved performance with value stocks indirectly bolsters Statman’s conjectural use of the behavioral theory to justify the lack of diversification amongst individual
Studies done by various researchers and scholars on corporate social responsibility impact on financial performance reveal mixed results with others citing a negative, positive neutral impact of CSR on financial performance of firms. Mwangi (2011) studied the relationship between CSR and financial performance of companies quoted at NSE. The results of the analysis conclude that there was an upward trend in performance of listed firms on the NSE as well as an upward trend in the amount of money investment in corporate social practices. This leaves managers with critical decisions to make especially on how much does a firm need to invest in CSR without compromising the returns of stakeholders more so the shareholders and whether investment in CSR has any impact at all on the financial performance of the firm.(Abagail & Donald ,
Flammer, C. (2013). Corporate Social Responsibility and Shareholder Reaction: The Environmental Awareness of Investors. Academy Of Management Journal, 56(3), 758-781. doi:10.5465/amj.2011.0744
There are many different areas in which a company may choose to focus its corporate social responsibility. Duke Energy has demonstrated CSR at high level and received an award for it. Social responsibility investment combines investors’ financial goals with their obligation and dedication to factors that ensure the well-being of society such as environmental friendly practices, economic growth and justice in society; and that is what Duke energy exactly did. These elements are not only aspects of corporate social responsibility, but also a show of the ethical standards of a company. It is unethical for some individuals to own so much and earn so much, at the expense of other suffering members of society. It is also unethical for companies to engage in environmentally demeaning practices that result in illnesses and loss of life and in conclusion Social corporate responsibility and the maintenance of high ethical standards is not an option but an
In recent years, more people begin to accept the concept of corporate social responsibility. Companies also pay more attention to the activities of CSR and investment. In addition to face the pressure of the environment and the social moral level, the enterprise managers also have the responsibility of the company 's performance and the value of the shareholder 's wealth. Therefore, enterprises need to pay more attention to the relationship between corporate social responsibility and financial performance.
Every business entity has social responsibilities. The four theories of social responsibility are the maximization of profits, moral minimum, stakeholder interest and corporate citizenship. Social responsibility goes hand in hand in regard to a company’s ethical standing. As a company, it’s crucial to have high ethical standards. The Ethisphere Institute ranks businesses annually to be named on their honorable and highly recognized list of the World’s Most Ethical Companies. These organizations are evaluated in terms of their ethics and compliance programs, corporate citizenship and responsibility, culture of ethics, governance and leadership, and innovation and reputation. One of the companies
Impact Investing is part of a trend of concepts that aimed to review the way people were investing their money. The idea of harnessing the power of the market in alignment with investor values dates back to the 19th century, when religious institutions sought to avoid investing in "sin" stocks, such as tobacco or alcohol industries. In the modern times, we can see the environmental and anti-apartheid movements in the 70’s as the return of these values. It was also in the 70’s that the concept of Social Responsible Investment (SRI) emerged. SRI was the inclusion of social and environmental variables besides financial return in the investment decisions. The idea was to avoid companies that could harm the environment or that could behave in unethical
McWilliams and Siegel (2001) define CSR as, “actions that appear to further some social good, beyond the interests of the firm and that which is required by law.” (p. 117) Corporate social responsibility is considered both strategic, in that it yields a firm benefits, and non-strategic, in that it encompasses an observed behavior (Burke and Logsdon 1996). There is also a perception that CSR encompasses a zero-sum trade-off with the economic interests of the business. It is somewhat accepted that accepting CSR strategies will be a more long-term payoff, while entailing short-term costs, leading modern businesses to abandon it in order to appease the interests of shareholders.
Verschoor, CMA, Curtis C. "Ethics: Do The Right Thing." Strategic Finance (2006). Retrieved on 18 September 2006 .
The following essay will expand on the usefulness and flaws of CAPM and other asset evaluation frameworks and in the end showing that despite all the evidence against CAPM it is still a useful model for determining asset investments.
Corporate social responsibility (CSR) can be defined as the "economic, legal, ethical, and discretionary expectations that society has of organizations at a given point in time" (Buchholtz, 2014, p. 32) The basic principles of corporate social responsibility consists of organizations that has the moral, ethical, and philanthropic duties to not only to earn a profit for investors, but they must also comply with the laws and standards set for businesses as well. Today’s CSR requires organizations to assume a much broader spectrum of their responsibilities that includes not only the stockholders, but employees, suppliers, customers, the local community, state, and federal governments, special interest and a variety of environmental groups as well. (Sharma, 2014)
Now-a-days it is considered that CSR is one of the major concerns of organization’s business ethics. Companies increasingly increase their corporate social responsibility (CSR) and ethical management accepting the positive impact on the bottom line. The vast bulk of Standard & Poor’s 500 companies publish sustainability reports unfolding their program challenges and achievements. These pre-emptive efforts can pr...